HG; 

437% 


IRLF 


37    225 


GIFT  OF 


GIFT 
NOV  23  1914 


The  War  and  Wall  Street 

An  Address 

Delivered  before  the  City  Club 

At  Rochester,  N.  Y.,  Nov.  14,  1914 

By  W.  C.  Van  Antwerp 


THE  WAR  AND  WALL  STREET. 

AN   ADDRESS   BY   W.    C.    VAN    ANTWERP    BEFORE 

THE  CITY  CivUB  0$  ROCHESTER,  N.  Y.,  NO- 
VEMBER 14,  1914. 

MR.  CHAIRMAN  AND  GENTLEMEN  : 

This  audience  still  retains,  and  will  always  re- 
tain a  vivid  impression  of  the  opening  weeks  of 
the  devastating  conflict  in  Europe  which  began 
in  the  last  days  of  July.  The  world  has  never 
experienced  such  a  shock,  nor  has  it  ever  been 
so  pitifully  stricken. 

Although  a  general  war  in  Europe  had  been 
discussed  again  and  again  since  the  Peace  of 
Paris  forty-three  years  ago,  with  recurrent  ap- 
prehensions over  Afghanistan  in  1884,  Constan- 
tinople in  1885,  Fashoda  in  1898,  Morocco  in 
1911  and  the  Balkans  in  1913,  no  such  crisis 
as  that  which  we  are  now  witnessing  was  seriously 
contemplated.  It  was  talked  of  as  men  talk  of 
the  infinity  of  space;  it  surpassed  imagination. 
When  it  suddenly  burst  upon  us  we  were  unable 
to  grasp  its  staggering  significance.  Like  bewil- 
dered spectators  of  a  monstrous  confusion,  we 
were  but  dimly  aware  that  a  new  and  incompre- 
hensible tragedy  was  shaking  the  world  to  its 
base. 

When  the  blow  fell,  no  portion  of  the  globe 
outside  the  actual  zone  of  war  felt  it  more  acutely 
than  Wall  Street,  and  it  is  of  Wall  Street's  part 


in  the  tragedy  that  I  am  here  to  speak.  Let  us 
therefore  select  from  the  riot  of  daily  occur- 
rences the  significant  incidents  that  most  directly 
affected  us  through  Wall  Street's  various  chan- 
nels, and  arrange  these  occurrences  in  their  re- 
lation to  each  other.  In  this  way  we  shall  become 
intelligently  conscious  as  to  what  has  happened, 
what  the  premonitory  symptoms  were,  how  they 
were  received,  what  they  have  taught  us,  and 
what  lies  ahead.  Perhaps  we  shall  learn,  too, 
how  well  or  how  ill  those  entrusted  with  large  re- 
sponsibilities in  the  Nation's  financial  center  have 
performed  their  tasks. 

Looking  back  over  this  short  but  frantic  inter- 
val we  find  that  the  world's  great  Stock  Ex- 
changes first  gave  warning  of  the  coming  storm. 
These  sensitive  barometers  first  felt  and  re- 
flected the  portentous  significance  of  military 
armament  and  the  gradual  piling  up  of  gold  in 
the  world's  financial  centers;  $100,000,000  added 
to  the  reserves  of  the  Reichsbank,  $150,000,000 
to  the  Bank  of  Russia,  $170,000,000  to  the  Bank 
of  France,  while  the  price  of  securities  all  over 
the  world  paused,  and  began  to  fall.  This  was  the 
situation  during  the  year  before  the  storm  burst. 

Historians  who  are  to  write  of  this  epoch  may 
look  upon  the  murder  of  the  Austrian  Archduke 
Francis  Ferdinand  June  28,  1914,  as  the  spark 
which  exploded  the  magazine,  but  the  Stock  Ex- 
changes and  Bourses  which  in  a  charged  and 
sullen  atmosphere  take  their  bearings  by  dead- 
reckoning,  had  already  warned  us  that  the  long- 
smouldering  jealousies,  race  hatreds,  and  distrust 


among  nations  which  for  many  mad  years  had 
found  expression  in  the  armament  mania,  were 
driving  Europe  toward  the  abyss.  If  the  inci- 
dent at  Sarajevo  had  not  occurred,  something 
else  wrould  have  served  the  purpose.  Preparation 
for  war  had  reached  the  breaking  point ;  it  could 
not  go  on  and  it  could  not  stop.  Peace  had  be- 
come a  luxury  too  expensive  to  be  borne.  Bank- 
ruptcy or  war  was  inevitable. 

Through  July  events  moved  quickly.  Those 
who  watched  in  Wall  Street  saw  Consols  easing 
off  and  all  international  markets  turning  heavy. 
Lombard  Street  discounts  rose.  "There  is  an 
uncomfortable  feeling  prevailing  here/'  was  the 
message  cabled  to  New  York  by  a  very  conserva- 
tive observer  in  London  on  July  2ist,  but  precisely 
why  or  wherefore  no  man  knew.  Two  days  later, 
July  23rd,  matters  grew  worse.  In  New  York 
sterling  exchange  moved  upward  with  great  ra- 
pidity; Paris  bid  almost  frantically  for  gold;  all 
Europe  sold  heavily  in  the  security  markets; 
British  and  French  Government  bonds  fell  por- 
tentously. There  were  vague  rumors  of  a  censor- 
ship of  dispatches  from  Vienna ;  an  unnoticed  but 
very  significant  news  dispatch  recorded  the  fact 
that  Servian  Government  bonds  had  fallen  four 
per  cent,  in  a  day.  Yet  with  all  these  portents  of 
evil,  which  clearly  implied  diplomatic  interchanges 
of  serious  purport,  the  business  world  was  in- 
credulous and  unready.  Not  one  man  in  a  million 
suspected  what  was  coming;  even  the  wisest 
were  caught  off  their  guard;  but  the  Stock  Ex- 
change barometer  told  the  story,  with  a  dumb 


precision  that  neither  thinks  nor  judges,  but 
merely  perceives.  The  action  of  these  delicate, 
highly  sensitized  mechanisms  in  the  closing  days 
of  July  reminds  one  of  Kant's  observation  on  the 
senses:  "Our  senses  do  not  deceive  us,  not  be- 
cause they  always  judge  correctly,  but  because 
they  do  not  judge  at  all." 

The  Statist  of  London  said  on  July  25th,  two 
days  after  Austria's  ultimatum  to  Servia  and  but 
three  days  before  Austria's  declaration  of  war, 
"We  do  not  think  that  there  is  any  reason  for 
exaggerated  fears ;"  and,  again,  "We  do  not  seri- 
ously believe  that  there  is  danger;"  and,  again, 
"We  feel  persuaded  that  the  Great  Powers  are, 
without  exception,  intent  upon  maintaining  peace," 
and  that  "the  whole  influence  of  Europe  will  be 
used  to  prevent  any  unwise  action."  On  the  same 
day  The  Economist,  of  London,  similarly  incredu- 
lous, asked  "Where  would  the  money  come  from 
with  which  to  carry  on  a  war  ?"  Two  days  later, 
July  27th,  with  all  the  Continental  stock  markets 
suffering  a  devastating  panic,  a  cable  dispatch 
from  Lombard  Street  to  New  York,  written  by 
an  authority  famous  for  his  accuracy  in  such  mat- 
ters, said  "The  best  financial  opinions  here  be- 
lieve, or  rather  hope,  that  the  European  scare 
has  been  overdone."  The  European  banks,  even 
on  that  grim  day,  made  no  advance  in  their  offi- 
cial discount  rates,  a  step  which  they  would  have 
been  quick  to  take  had  they  looked  upon  war  as 
imminent.  There  could  be  no  more  striking  evi- 
dence than  this  of  Europe's  unreadiness,  and 
especially  of  that  of  London  and  the  Bank  of 


England,  where,  after  making  allowance  for  the 
necessity  for  calm  counsels,  the  Bank  must  in- 
fallibly have  taken  cognizance  of  the  impending 
disaster  had  its  Governors,  or  the  Government  of 
the  Empire,  but  dimly  foreseen  it.  Yet  on  that 
day  $12,000,000  in  gold  went  out  from  New  York 
to  London  at  rates  which  expressed  the  fear  of 
shippers  and  insurers  that  a  hostile  fleet  might 
intercept  it  on  the  ocean,  while  prices  of  securi- 
ties again  crashed  all  over  the  world,  and  Ameri- 
can wheat  rose  seven  cents  a  bushel.  On  the 
next  day,  July  28th,  Austria  declared  war  on 
Servia.  Hostilities  began  at  once;  from  that 
time  forward  titanic  forces  of  death  and  destruc- 
tion were  unloosed. 

In  ten  days  following  Austria's  declaratioa  of 
war  $45,000,000  of  American  gold  went  out.  All 
Europe  demanded,  instantly,  all  its  credit  bal- 
ances, while  simultaneously  ceasing  to  pay  its  own 
debts  through  a  resort  to  the  moratorium.  New 
York  thus  became  the  only  market  for  gold  in 
the  world,  and  the  lack  of  protection  by  concen- 
tration which  makes  our  store  an  easy  prey  to 
other  nations  in  times  of  peace,  became  a  source 
of  peril  when  to  that  difficulty  was  added  the 
emergency  of  war. 

Another  difficulty  even  more  grave  confronted 
our  bankers  in  this  crisis,  one  that  has  not  yet 
been  solved  and  one  that  will  not  be  solved  in 
this  generation.  I  refer  to  that  inherent  weak- 
ness in  the  financial  position  of  the  United  States 
with  reference  to  other  nations  as  represented  by 
our  stupendous  debt  to  Europe.  Although  we 

5 


have  normally  an  apparent  credit  balance  in  trade 
of  over  $500,000,000  annually,  we  have  in  fact 
other  annual  international  debts  of  at  least  twice 
that  amount,  so  that  our  boasted  trade  balance 
not  only  is  wiped  out,  but  a  balance  accumulates 
against  us  which  might  compel  us  to  export  at 
least  $500,000,000  in  gold  to  pay  our  debts  each 
year.  This  debt  grows  out  of  items  which  are 
not  included  in  the  trade  balances.  I  was  in- 
formed recently  by  Sir  George  Paish,  who  is  now 
visiting  this  country  in  his  capacity  as  assistant 
to  the  Chancellor  of  the  Exchequer,  and  who  is  a 
recognized  authority  on  large  matters  of  inter- 
national economics,  that  the  net  debt  of  the 
United  States  to  Europe  amounts  to  about  $600,- 
000,000  a  year.  Of  this  staggering  total  $300,- 
000,000  arises  from  interest  and  dividends  on 
American  securities,  $200,000,000  from  the  heavy 
expenditures  of  our  tourists,  and  the  balance 
from  imports,  freights  paid  to  foreign  vessels, 
premiums  paid  for  foreign  fire  and  marine  insur- 
ance, incomes  paid  to  the  estates  of  our  expatri- 
ated American  men  and  women,  and  many  similar 
items.  Thus  the  tables  are  entirely  turned  against 
us,  and  instead  of  an  annual  trade  balance  of 
$500,000,000,  we  have  an  annual  net  debt  of 
$600,000,000. 

It  is  well  understood  that  Sir  George  Paish 
came  over  here  to  collect  or  to  arrange  for  the 
collection  of  a  part  of  this  debt.  We  had  always 
known  that  we  owed  it,  but  Europe  had  never 
exercised  its  power  to  collect  it,  finding  it  more 
profitable  to  buy  our  good  securities  than  to  with- 

6 


draw  our  gold.  Like  spendthrifts,  we  as  a 
nation  had  thus  continued  to  pile  up  our  obliga- 
tions with  careless  indifference  to  consequences. 
When,  therefore,  Sir  George  had  explained  that 
Europe  could  no  longer  buy  our  securities  and 
that  a  drain  upon  our  gold  reserves  was  inev- 
itable, a  gentleman  who  had  listened  to  him 
stated  the  case  exactly  when  he  said,  "The 
sheriff,  with  a  writ,  is  on  the  door-step." 

Confronted  with  the  difficulty  of  meeting  an 
immediate  and  inevitable  drain  of  gold  the 
anxieties  of  Wall  Street  bankers  may  be  bet- 
ter imagined  than  described.  All  other  dif- 
ficulties, for  the  moment,  became  relatively 
insignificant.  At  the  very  outset  of  war 
sight  exchange  on  London,  normally  $4.86  and 
almost  never  higher  than  $4.89,  rose  to 
$5.00,  then  to  $6.00,  and  finally  to  $7.00, — a 
rate  never  before  witnessed.  That  persons 
could  be  found,  hat  in  hand,  begging  for  the 
privilege  of  paying  $7.00  for  $4.86  shows  how 
completely  our  machinery  of  exchange  had 
broken  down.  We  were  not  only  heavily  in  debt, 
but  the  normal  vehicles  of  commerce  were 
stricken  with  a  palsy  and  insurance  on  gold  in 
transit  was  almost  unobtainable.  With  all  the 
energy,  all  the  money,  all  the  credit  of  the  five 
richest  nations  in  Europe,  numbering  over  three 
hundred  millions  of  people,  suddenly  devoted  not 
to  production,  but  to  destruction, — not  to  saving, 
but  to  wasting,  we  alone  among  the  nations  be- 
gan to  pay  as  best  we  could,  and  paid  in  gold, 
while  nobody  paid  us.  The  wonder  is  not  that 

7 


we  had  difficulty  in  paying,  but  that  we  paid  at 
all.  And  yet  since  the  war  began  we  have  paid 
or  arranged  to  pay  $180,000,000,  and  in  the  cal- 
endar year  to  date  more  than  $300,000,000 — a 
store  of  gold  exceeding  the  entire  holdings  of  the 
Bank  of  England.  No  other  nation  in  the  world 
would  have  done  it ;  no  other  could  have  done  it. 

For  energy  displayed  and  real  service  in  the 
cause  of  safety  and  relief  in  the  face  of  por- 
tentous difficulties,  our  bankers  in  this  emergency 
achieved  their  greatest  success.  Yet  this  was 
but  one  of  their  troubles.  Without  precedents 
to  guide  them,  with  the  new  Bank  Act  not 
yet  in  practical  operation,  they  saw  ordinary 
standards  of  value  disappear  in  loans  aggre- 
gating $2,000,000,000;  they  were  confronted 
with  widely  fluctuating  prices  of  raw  materials, 
famine  in  many  lines  of  manufacturing  essen- 
tials such  as  wool,  dye-stuffs  and  ferro  man- 
ganese; an  utter  breakdown  in  the  movement  of 
cotton;  cancellations  of  enormous  amounts  of 
projected  extensions  and  shutting  down  of 
factories. 

Across  the  water  they  saw  the  Bank  of  Eng- 
land's official  rate  of  discount  advanced  from 
3%  to  10%,  with  a  run  on  that  institution  which 
resulted  in  a  loss  in  gold  of  $52,500,000  in  the 
first  week  of  the  disturbance.  They  saw  the 
Bank's  ratio  of  reserve  fall  from  the  extraordi- 
narily low  figure  of  40%  to  the  paralyzing  figure 
of  14%%.  They  saw  the  British  Treasury  di- 
rectly issuing  its  own  paper  money  for  the  first 
time  in  modern  history,  and  a  moratorium,  never 

8 


resorted  to  in  modern  times.  They  realized,  in  a 
word,  that  a  world  given  over  to  destruction  was 
living  on  expedients,  and  that  the  British  Empire 
had  come  as  near  as  it  will  ever  come  to  putting 
up  the  shutters.  In  a  week  Europe's  prosperity 
was  turned  into  ruin,  its  opulence  into  insolvency. 

At  any  time  of  crisis,  our  bankers  labor  under 
handicaps  to  which  bankers  abroad  are  not  sub- 
jected. Other  countries  are  enabled  by  the 
agency  of  their  centralized  banking  systems  to 
sustain  business  and  supply  credit  under  all  cir- 
cumstances. They  have  a  giant's  strength  and 
they  use  it  like  a  giant,  knowing  that  the  country 
and  the  government  stand  firmly  behind  them. 
Thus  the  British  ministry  sustained  the  shock 
to  credit  in  this  emergency  by  pledging  the  credit 
of  the  government  behind  each  factor  in  the  trade 
system,  its  guarantee  of  premoratorium  bills 
alone  amounting  to  $500,000,000.  Postmora- 
torium  bills  have  also  been  freely  guaranteed, 
and  arrangements  have  been  made  by  which  the 
government  and  the  banks  will  assume  a  part 
of  the  risk  upon  Stock  Exchange  loans.  Ger- 
many, in  a  different  way,  but  none  the  less 
effectively,  has  opened  credit  offices  throughout 
the  Empire,  and  total  authorizations  on  this 
account  approximate  $375,000,000. 

In  the  United  States  we  are  quite  differently 
situated.  In  a  crisis  there  is  no  centralization  of 
power,  no  organization  of  resources.  Each  bank 
must,  in  a  large  sense,  stand  on  its  own  feet. 
Knowing  that  his  individual  action  can  have  but 
trifling  effect  on  a  country-wide  crisis,  the  aver- 


age  American  banker  feels,  and  with  good  reason, 
that  the  best  he  can  do  is  to  take  care  of  his  own 
institution.  Industrially  as  well  as  financially 
there  is  no  cohesion. 

Notwithstanding  these  handicaps  our  bankers 
went  bravely  ahead  in  the  effort  to  safeguard 
public  confidence,  private  credit,  and  American 
commerce.  That  the  Government  at  Washing- 
ton contributed  handsomely  to  these  efforts  goes 
without  saying.  Co-operation  between  bankers 
and  Government  found  expression  in  the  creation 
of  an  emergency  currency  under  the  Aldrich- 
Vreeland  Act,  while  special  legislation  by  Con- 
gress established  as  a  basis  for  currency  ware- 
house receipts  for  cotton,  tobacco  and  other  com- 
modities. The  Treasury  created  a  Bureau  of 
War  Risk  Insurance,  and  the  banks  themselves 
issued  Clearing  House  certificates  which  enabled 
them  to  meet  immediate  needs.  The  telephone 
and  telegraph  through  many  anxious  days  and 
nights  were  used  to  bring  about  some  measure 
of  concerted  action  by  bankers  in  all  the  large 
cities. 

Next  to  the  credit  of  the  Government  comes 
that  of  New  York  City.  The  war  had  scarce 
begun  when  maturing  city  warrants  in  London 
and  Paris  necessitated  the  provision  of  a  gold 
loan  of  $100,000,000  to  the  City  of  New  York, 
$82,000,000  of  which  was  used  to  meet  the  City's 
foreign  borrowings.  The  best  thought  of  our 
bankers  immediately  concentrated  on  this  prob- 
lem, which  at  the  most  critical  stage  of  our  dif- 
ficulties was  brought  to  a  successful  conclusion. 

10 


Every  bank  and  trust  company  in  the  city,  with 
one  single  exception,  came  forward  with  its 
share  of  the  subscription.  It  was  a  great  achieve- 
ment. That  difficulty  met,  our  bankers  next 
turned  their  attention  to  the  creation  of  a  pool 
of  $100,000,000  to  meet  pressing  mercantile 
obligations  abroad,  and  to  providing  New  York's 
share  of  the  $135,000,000  pool  to  relieve  the 
cotton  situation. 

That  there  were  heavy  drains  on  bank  reserves 
goes  without  saying,  and  yet  there  was  the  obvi- 
ous necessity  of  diminishing  those  reserves  still 
further  by  advancing  them  freely  to  needy  bor- 
rowers. The  first  instinct  of  every  one  at  a  time 
like  this  is  to  hoard,  but  no  man  can  say  that  any 
bank  in  New  York  did  so,  nor  did  aught  else  to 
strengthen  itself  at  the  expense  of  the  com- 
munity. Bankers  are  dealers  in  credit;  restrict- 
ing it  through  hoarding  means  discredit.  The 
fact  that  reserves  of  the  Clearing  House  banks 
in  New  York  City  were  $50,000,000  below  their 
legal  requirements  throughout  the  early  stages 
of  the  war,  shows  that  our  bankers,  while  recog- 
nizing the  perils  involved,  were  keenly  conscious 
of  the  fact  that  their  ultimate  treasure  is  not 
kept  for  display,  but  must  be  employed  when 
necessity  demands.  I  have  yet  to  hear  on 
this  score  of  any  just  complaint  from  worthy 
borrowers. 

It  is  an  axiom  in  the  scientific  management  of 
gold  reserves  that  they  are  to  be  protected,  not 
by  forbidding  the  payment  of  debts  already  in- 
curred, but  by  the  prevention  of  new  ones.  If 

ii 


credit  has  its  advantages,  it  has  also  at  times 
its  disadvantages,  and  to  minimize  these  disad- 
vantages by  preventing  fresh  mercantile  liabili- 
ties at  a  time  of  alarm,  calls  for  great  delicacy, 
judgment  and  tact,  especially  when  to  a  formid- 
able foreign  drain  is  added  a  domestic  drain.  At 
such  a  time  everybody  wants  to  borrow  at  once, 
and  the  demand  comes  just  when  bankers  like  it 
least.  If  the  demand  is  satisfied  reserves  are 
depleted;  if  it  is  not  satisfied  there  is  alarm  and 
panic.  In  the  emergency  through  which  we  have 
just  passed  I  need  hardly  assure  you  that  bold 
and  courageous  banking  has  been  seen  at  its 
best  in  our  financial  center.  There  has  been  un- 
selfish patriotism,  a  quick  grasp  of  expedients, 
and  a  firm  front  in  the  face  of  danger.  With 
bankruptcy  threatening  the  country's  industries, 
with  no  sure  and  certain  ground  upon  which  to 
stand,  with  conditions  infinitely  worse  than  any 
heretofore  encountered,  there  was  no  panic.  We 
had,  to  be  sure,  closed  some  of  the  avenues 
through  which  panics  find  expression.  In  those 
that  remained  open  there  was  no  sign  of  alarm, 
because  with  one  accord  the  Government,  the 
newspapers,  and  the  private  citizen  for  the  first 
time  in  our  history  showed  a  firm  confidence  in 
the  men  at  the  helm.  The  narrow  little  Wall 
Street  of  fiction,  the  Wall  Street  of  the  dema- 
gogue, no  longer  exists.  In  its  place  is  the  real 
Wall  Street,  a  broad  highway  from  ocean  to 
ocean,  meeting  the  needs  and  serving  the  pur- 
poses of  a  continent. 


12 


THE  STOCK  EXCHANGE. 

One  of  the  very  first  things  that  happened 
when  the  war  burst  was  the  paralysis  of  the 
world's  Stock  Exchanges.  The  Bourses  at  To- 
ronto and  Madrid  closed  July  28th;  those  at 
Vienna,  Budapest,  Brussels,  Antwerp,  Berlin  and 
Rome  on  July  29th;  St.  Petersburg,  Montreal 
and  all  South  American  centers  July  3Oth.  The 
Paris  Bourse,  gorged  with  huge  masses  of  un- 
salable Balkan  loans  and  Russian  industrials  in 
addition  to  their  own  new  Government  loan,  was 
so  deluged  by  sales  that  a  market  no  longer 
existed.  Accordingly  the  Coulisse  and  later  the 
Bourse  itself  was  closed,  thus  throwing  all  the 
world's  sales  of  securities  on  the  Exchanges  of 
London  and  New  York.  For  the  first  time  in  its 
history  the  London  Exchange,  unable  to  with- 
stand such  a  torrent  of  liquidation,  closed  its 
doors  at  9:00  A.  M.,  July  3ist,  after  the  announce- 
ment of  several  failures.  The  Stock  Exchange 
in  New  York  alone  remained  open. 

When  the  Governors  of  our  great  Exchange 
gathered  together  on  that  eventful  morning  they 
were  burdened  with  responsibilities  of  the  ut- 
most gravity.  While  aware  that  it  would  be  a 
splendid  achievement  to  continue  business  alone 
among  the  great  security  markets  of  the  world, 
they  realized  none  the  less  that  the  over-night 
accumulation  of  selling  orders  from  every  quar- 
ter of  the  world  would  impose  upon  brokers,  in- 
vestors, speculators  and  bankers  a  strain  that 

13 


could  not  be  borne.  Everybody  wanted  to  sell 
in  New  York  because  there  was  no  other  place  to 
sell.  Over-night  orders  revealed  a  frantic  state 
of  mind,  and  this  was  especially  true  of  cables. 
There  was  no  price  limit.  "Sell  at  the  market/' 
was  the  word,  and  utter  demoralization  the  pros- 
pect. Europe  alone  owns  $6,000,000,000  of  our 
securities.  Even  if  one-fifth  or  one-tenth  of 
these  holdings  were  unloaded  on  New  York  with 
such  suddenness,  we  could  not  have  absorbed 
them,  nor  could  we  have  found  a  way  to  pay  for 
them  in  the  circumstances  that  then  prevailed. 
Literally  standing  to  be  shot  at,  with  the  cer- 
tainty of  a  panic  unparalleled  in  its  consequences 
to  American  business  and  industry,  the  Gov- 
ernors decided,  at  fifteen  minutes  before  ten, 
to  close  the  Exchange.  Their  action  calls  for 
nothing  but  praise;  its  importance  to  the  whole 
community  is  beyond  discussion. 

The  Stock  Exchange  is  not  a  fair-weather  in- 
stitution. It  has  survived  many  panics  and  it 
has  grown  in  strength  through  all  our  American 
vicissitudes.  Its  Governors  decided  to  close,  not 
to  protect  its  members,  but  to  protect  the  Ameri- 
can public  from  a  frightful  assault  on  collateral 
values  and  a  destructive  drain  on  all  forms  of 
credit.  No  group  of  business  men  in  America 
suffered  more  from  this  action  than  the  members 
of  the  exchange;  their  business  came  to  an  end 
while  their  expenses,  always  heavy,  continued, 
all  this  following  a  long  period  of  dullness  and  di- 
minished profits  in  the  security  markets.  Yet 


they  did  their  duty  as  good  citizens,  regardless  of 
the  sacrifices  involved. 

Just  as  familiarity  breeds  contempt  and  indif- 
ference, so  it  sometimes  happens  that  facilities 
and  conveniences  with  which  we  are  most  fa- 
miliar in  our  great  avenues  of  trade  are  not  ap- 
preciated until  they  are  interrupted  or  lost.  Those 
who  without  study  of  the  Stock  Exchange  have 
come  to  speak  of  it  as  a  gambling  arena  cannot 
fail  to  have  been  impressed  with  the  fact  that 
something  more  than  a  gambling  place  disap- 
peared when  its  doors  were  closed.  What  actual- 
ly disappeared  was  the  standard  American  index 
of  trade  and  credit ;  what  was  closed  was  a  great 
market  place  whose  primary  function  had  been 
the  distribution  of  American  securities,  which 
make  possible  American  enterprise.  We  found 
it  inconvenient,  to  be  sure,  to  have  our  securities 
poured  back  upon  us  by  foreigners,  but  that  fact 
must  not  obscure  the  greater  consideration  that 
it  was  through  these  same  Stock  Exchange  facili- 
ties that  foreign  capital  was  enabled  to  invest  in 
those  securities. 

Persons  who  had  never  before  understood  the 
primary  importance  of  the  Stock  Exchange  were 
quick  to  realize  that  a  frozen  credit  market  had 
resulted  from  its  closing.  Banks,  courts,  and 
legislatures  had  long  accustomed  themselves  to  a 
free  and  unrestricted  market  for  securities  as  the 
one  test  of  values.  When  the  Stock  Exchange 
closed  its  doors  there  was  no  longer  a  guide  upon 
which  to  base  values  that  had  heretofore  appeared 


in  loans  secured  by  collateral,  and  this  introduced 
into  our  perplexities  another  difficulty.  Here 
again  the  action  of  the  Wall  Street  banks  calls 
for  the  highest  praise.  With  the  market  closed 
for  an  indefinite  period  these  banks  were  forced 
to  carry  an  immense  burden  of  loans  on  Stock 
Exchange  collateral  ordinarily  fluid  beyond  all 
other  forms  of  collateral,  but  now  frozen  solid. 
All  their  secondary  reserves  became,  as  it  were, 
unmarketable  investments,  and  "intrinsic  val- 
ues"— whatever  that  may  mean, — came  by  force 
of  circumstances  to  take  the  place  of  market  val- 
ues. It  was  a  state  of  affairs  quite  beyond  prece- 
dent, but  the  banks  faced  it  as  they  faced  all  their 
other  difficulties.  So  far  as  I  am  aware,  not  a 
single  loan  was  pressed  for  payment,  and  where 
collateral  seemed  to  demand  re-enforcement,  the 
request  was  couched  in  terms  of  suggestion,  quite 
without  peremptory  demand,  while  rates  of  inter- 
est charged  on  these  loans  were  gradually  re- 
duced. 

Meantime,  with  the  same  courage  and  prompt- 
ness which  led  to  the  closing  of  the  Exchange,  its 
members  have  so  strengthened  their  bank  loans 
and  so  reduced  them  that  no  difficulty,  I  fancy, 
need  be  apprehended  on  that  score.  They  have 
voluntarily  accomplished  the  liquidation  of  more 
than  $100,000,000  of  unfilled  contracts  without 
adding  to  their  borrowings  at  the  banks,  and 
they  have  cleared  the  situation  of  one  of  its  great- 
est dangers  by  maintaining,  as  the  official  mini- 
mum, the  level  of  prices  recorded  on  their  last  day 
of  business.  They  have  kept  in  close  working 

16 


contact  at  all  times  with  the  banks,  the  authori- 
ties at  Washington,  and  the  Stock  Exchange  in 
London — all  this  with  a  view  to  aiding  the  restor- 
ation of  confidence  and  credit.  Through  the 
various  Committees  organized  for  the  purpose 
more  than  $100,000,000  bonds  have  changed 
hands,  and  more  than  250,000  shares  of  stock. 
Indeed  it  might  be  said  that  the  Exchange  has 
not  actually  closed  its  doors  at  any  time.  At  least 
it  has  provided  a  means  for  necessitous  selling  to 
some  extent,  and  for  investment  purchases  at  a 
fixed  level  of  prices. 

Because  of  the  progress  that  has  been  made, 
a  natural  demand  has  arisen  that  the  Exchange 
reopen.  Now  in  so  far  as  the  Stock  Ex- 
change and  its  members  are  concerned;  there  is 
no  reason  why  business  should  not  be  resumed. 
They  have  cleared  up  their  balances  and  strength- 
ened their  loans  to  an  extent  which  has  put  them 
in  readiness.  But  the  same  reason  that  led  them 
to  close  has  thus  far  impelled  them  to  remain 
closed,  namely,  the  greatest  good  for  the  greatest 
number. 

The  purpose  of  the  Stock  Exchange  is  to  facili- 
tate the  exchange  of  securities  and  thereby  assist 
in  the  creation  of  new  enterprises.  At  present 
there  are  no  new  enterprises,  and  there  can  be 
none  until  credit  facilities  are  restored.  To  re- 
open the  Stock  Exchange  until  tolerably  normal 
conditions  prevail  in  the  credit  market  would 
force  necessitous  selling  upon  investors.  This 
would  result  in  abnormal  prices  which  are  un- 
economic, unethical  and  unjust  as  a  basis  of  set- 

17 


tlement.  It  was  to  prevent  the  enforcement  of 
contracts  upon  such  a  basis  that  moratoria  were 
established  throughout  the  world.  The  New 
York  Stock  Exchange  is  a  part,  but  only  a  part, 
of  the  financial  machine.  One  part  of  a  machine 
cannot  maintain  its  functions  when  all  other  parts 
are  stilled.  Any  such  attempt  would  mean  that 
large  numbers  of  innocent  investors,  wholly  un- 
related to  the  war,  would  suffer  hardships.  What 
has  been  of  vastly  greater  importance  in  these 
opening  months  of  the  war  has  been  the  resump- 
tion of  an  international  exchange  not  of  securi- 
ties, but  of  commodities  which  are  needed  to 
maintain  human  life.  This  also  is  a  matter  of 
credit,  and  until  such  ample  credit  facilities  are 
restored  as  will  insure  a  free  market  for  food- 
stuffs and  supplies,  the  Stock  Exchange  should 
not,  by  a  resumption  of  its  activities,  hamper  or 
restrict  that  movement.  These  are  reasons  why 
the  Stock  Exchange  has  not  reopened. 

Another  reason  lies  in  the  fact  that  Europe  is 
a  large  holder  of  American  securities,  and  to  re- 
open our  Stock  Exchange  prematurely,  when  all 
the  others  are  closed,  would  merely  invite  a  re- 
sumption of  that  concentrated  pressure  on  New 
York  which  we  brought  to  an  end  by  closing  our 
doors.  Sir  George  Paish  has  stated  recently  that 
he  does  not  believe  London  will  be  a  heavy  seller 
of  our  securities.  In  making  that  statement  he 
wished,  no  doubt,  to  reassure  us,  and  I  hope  he 
has  stated  the  case  correctly.  France  will  cer- 
tainly sell  heavily.  In  any  case  Europe  will  not 
be  paid  for  those  securities  in  gold,  and  measures 

18 


looking  to  other  forms  of  payment  are  now  un- 
der way.  It  must  be  borne  in  mind  that  where 
payments  are  due  abroad,  we  must  pay  them 
promptly,  but  where  payment  is  due  on  this 
side,  as  in  the  case  of  securities  sold  here  by  for- 
eigners, the  creditor  receives  his  money  here, 
and  the  question  of  when  and  how  to  convert  it 
into  foreign  funds,  becomes,  in  a  crisis  like  this, 
a  matter  of  arrangement  between  the  parties  in 
interest. 

Meantime  improvement  continues  in  many 
directions.  There  are  record-breaking  exports 
of  foodstuffs  and  of  various  supplies  of  manu- 
factured articles;  cotton  is  slowly  beginning  to 
find  a  market,  money  is  accumulating  and  the 
resources  of  the  banks  will  be  greatly  augmented 
by  the  operation  of  the  new  Bank  Act.  There  is 
a  marked  reduction  in  loans  and  a  reviving  de- 
mand for  old  and  seasoned  investments.  In  the 
long  run  imports  and  exports  will  bring  about 
offsets,  and  trade  will  go  on  as  before.  The 
British  moratorium  has  already  ended;  that  of 
France  has  been  modified,  and  the  moratoria 
of  other  countries  are  expiring  each  week. 
Affairs  in  this  country  are  moving  in  an  orderly 
way  toward  recovery.  The  banks  in  the  central 
cities  have  restored  their  legal  reserves,  and  fears 
of  a  financial  crisis  have  disappeared.  But  one 
serious  difficulty  remains,  having  a  vital  bearing 
on  the  entire  investment  situation.  I  refer  to  the 
plight  of  the  railways,  which  to  a  large  extent 
affects  the  banks,  the  Stock  Exchange,  and  the 
entire  credit  position. 

19 


THE  RAILWAY  SITUATION. 

We  are  agreed,  I  am  sure,  that  for  the  sake 
of  the  general  welfare  of  the  United  States,  it 
is  necessary  that  railway  revenues  must  be  at 
all  times  sufficient  to  meet  expenses  of  operation, 
including  liberal  wages,  adequate  repairs,  re- 
newals and  taxes,  and  that  there  must  be  a  fair 
return  to  investors,  with  a  safeguard  in  the  shape 
of  marginal  surplus.  We  may  have  our  own 
opinions  as  to  the  selfishness  of  railway  employes, 
the  rapacity  of  railway  creditors,  and  the  mis- 
takes of  railway  managers,  but  we  are  agreed 
that  the  railways  must  earn  a  living  wage.  That 
much  conceded,  let  us  see  whether  our  American 
railway  properties,  as  measured  by  those  of  other 
nations,  are  themselves  of  such  high  standard  as 
to  merit  this  fair  compensation  for  services  ren- 
dered. 

The  first  thing  we  discover  is  that  it  costs  seven 
mills,  on  the  average,  to  haul  a  ton  of  freight  a 
mile  in  America,  whereas  in  England  it  costs  2.33 
cents,  in  France  1.41  cents,  and  in  Germany  1.42 
cents.  Next  we  find  that  the  average  daily  com- 
pensation paid  to  railway  employes  in  the  United 
States  is  $2.23,  while  in  England  it  is  $1.35,  in 
France  88  cents,  and  in  Germany  81  cents.  We 
find  that  in  the  United  States,  1,071,086  tons  are 
hauled  annually  per  mile  of  line,  while  in  France 
the  total  is  but  496,939,  and  in  Germany  827,- 
400;  and  that  while  the  average  stock  and  bond 
debt  per  mile  of  railways  in  the  United  States 

20 


is  $60,000,  that  of  England  is  $265,000,  of 
France  $137,000,  and  of  Germany  $109,000. 
Finally  we  learn  that  whereas  in  1902  the  rail- 
ways of  this  country  paid  $54,465,000  in  taxes, 
this  amount  representing  8.35  per  cent,  of  their 
income,  in  1914  they  paid  $142,150,000,  repre- 
senting 16.69  Per  cent-  of  the*1"  income,  this  being 
a  higher  tax  levy  than  that  paid  by  any  other 
form  of  private  property  in  America  devoted  to 
a  public  use. 

From  these  considerations  we  are  enabled  to 
state,  first,  that  our  railway  service  costs  less 
than  that  of  any  other  country;  second,  that  our 
railways  excel  all  others  in  the  compensation  paid 
employes;  third,  that  American  railways  do  more 
work  per  mile  of  line  than  any  others;  fourth, 
that  they  are  capitalized  on  a  far  lower  level  than 
any  others;  and  fifth,  that  they  pay  more  than 
a  fair  share  in  taxes.  If  therefore  any  form  of 
private  property  is  entitled  to  earn  a  fair  return 
on  its  invested  capital,  our  American  railways 
are  preeminently  in  that  class.  It  seems  to  me 
we  should  be  proud  of  them. 

While  our  railroads  do  more  work  for  less 
money  than  any  in  the  world,  and  while  they  are 
better  equipped  for  the  economical  handling  of 
long-distance  freight  in  large  bulk,  they  are  far 
behind  the  European  standards  as  to  double-track, 
abolition  of  grade-crossings,  and  station  facilities 
for  passengers  and  freight.  These  things  cost 
money;  and  even  if  no  new  construction  takes 
place,  capital  requirements  for  this  development 
work  alone,  year  after  year,  will  be  enormous. 


21 


Railroads  in  other  countries  have  spent  freely 
in  this  direction,  which  explains  the  difference 
between  their  capitalization  and  ours.  In  Amer- 
ica the  outstanding  stock  and  debt  of  the  rail- 
ways, as  we  have  seen,  averages  about  $60,000 
to  the  mile;  in  England  it  is  $265,000.  The  only 
way  we  can  raise  the  money  to  do  the  necessary 
work,  and  so  bring  our  railroads  up  to  the  stan- 
dards demanded,  is  by  the  sale  of  securities,  just 
as  they  have  done  in  England  and  elsewhere.  But 
neither  the  rate  of  return  actually  received  on 
the  par  value  of  American  railroad  bonds  and 
stocks  today,  nor  the  security  which  can  be 
offered  in  future,  will  make  it  easy  to  raise  this 
needed  capital. 

These  were  the  conclusions  of  the  Hadley  Com- 
mission of  1911 — by  all  odds  the  most  intelligent 
commission  that  has  ever  considered  the  railroad 
problem.  Today  conditions  have  changed  greatly 
for  the  worse.  The  outstanding  issues  of  Amer- 
ican railway  securities,  about  $20,000,000,000  in 
all,  issued  before  Government  and  State  regula- 
tion became  the  fashion,  claim  our  first  attention. 
These  securities  were  purchased  in  good  faith 
by  investors  at  home  and  abroad ;  scarcely  a  single 
one  of  our  people  can  escape  a  share  of  the  burden 
that  must  result  if  their  value  is  to  become  per- 
manently impaired.  The  depositor  in  a  savings 
bank  will  suffer,  because  the  bank's  investments 
are  bottomed  on  railway  securities ;  the  holder  of 
an  insurance  policy  will  suffer  for  the  same  rea- 
son; our  colleges  and  universities,  our  hospitals 
and  charitable  institutions,  our  trust  funds,  our 

22 


endowments,  and  our  army  of  4,000,000  private 
investors,  each  contributes  a  link  to  the  chain  of 
universal  distress  which  must  result  from  the 
plight  of  the  railways.  This  is  not  because  the 
underlying  first  mortgages  of  the  older  systems 
are  in  danger  of  default,  but  because  the  property 
thus  mortgaged  must  inevitably  deteriorate  from 
year  to  year  unless  new  money  is  constantly  put 
back  into  it. 

It  was  the  understanding,  implied  if  not  ex- 
pressed when  these  investments  were  placed  in 
the  hands  of  the  public,  that  they  would  continue 
on  a  paying  basis,  and  that  the  properties  behind 
them  would  be  maintained  at  a  high  state  of 
efficiency.  It  never  occurred  to  purchasers  or 
sellers  that  the  time  would  ever  come  in  America 
when  necessary  replacements  would  not  be  made, 
or  when  necessary  net  revenues  would  be  inter- 
fered with.  To  the  extent  that  these  implied 
promises  have  not  been  kept,  holders  of  Amer- 
ican railway  securities  have  been  betrayed. 

Railways  are  no  different  from  any  other  form 
of  property  devoted  to  public  purposes.  The  mill, 
the  factory,  the  steamship,  and  even  the  govern- 
ment, has  to  face  the  problem  of  maintaining 
net  income  sooner  or  later,  but  with  this  dif- 
ference: governments  may  proceed  with  ex- 
penditures of  all  kinds  through  taxation,  and 
privately  owned  industrial  enterprises  may  raise 
prices  or  retrench  by  reducing  output;  but  the 
railroads  must  continue  to  run  on  schedule  time, 
must  maintain  wage  agreements,  must  go  ahead 
with  the  changes  and  improvements  demanded 

23 


by  forty-eight  States  and  the  Federal  Govern- 
ment, and  may  not  increase  their  rates  although 
pressed  between  the  millstones  of  sluggish 
revenue  and  diminished  credit  on  the  one  side, 
and  political  hostility  and  excessive  regulation  on 
the  other.  The  mill  owner  has  a  diversity  of  out- 
put; if  one  proves  unprofitable  he  may  drop  it 
and  turn  to  others ;  but  the  railroad  has  only  one 
thing  to  sell — that  is,  transportation. 

In  the  rate  case  just  argued  at  Washington  it 
was  shown  that  the  return  on  railway  capital 
employed  today  is  3.99% ;  yet  renewals  of  notes 
of  roads  enjoying  the  high  credit  of  the  New 
York  Central  and  the  Lake  Shore  today  cost  7%. 
The  greater  the  fall  in  net  income  the  higher  the 
rate  of  interest  demanded  by  lenders  of  capital. 
There  is  no  escape  from  this  double-barreled  as- 
sassination of  railway  credit.  Investors  and 
speculators  will  not  buy  railway  securities  today 
because  they  must  take  risks  which  never  can  be 
accurately  forecast  at  any  time,  and  which  are 
now  out  of  all  proportion  to  the  probable  gain. 
Can  we  wonder  at  their  attitude?  Is  there  any 
investor  in  this  room  who  will  today  put  his  money 
into  junior  issues  of  railway  bonds  or  new  issues 
of  capital  stock?  If  you  were  a  banker  would 
you  lend  the  money  of  your  depositors  to  rail- 
ways in  America  in  face  of  their  returns  today? 
No;  and  there  will  be  no  return  of  normal  in- 
vestment demand  while  present  conditions 
prevail. 

What  are  these  conditions?  Stated  briefly, 
last  year's  gross  earnings  fell  short  of  those  of 

24 


the  preceding  year  by  $79,479,672.  This  is  bad 
enough;  but,  notwithstanding  the  utmost  efforts 
at  economy,  expenses  actually  increased  in  the 
year  by  $31,434,374,  which,  added  to  the  loss 
of  $79,479,672  in  gross,  reduced  the  net  by  the 
prodigious  sum  of  $110,914,046.  Nor  is  this  all. 
The  earnings  as  I  have  given  them  do  not  in- 
clude deduction  of  taxes.  Taxes  in  the  fiscal 
year  1914  exceeded  those  of  1913  by  over  $13,- 
000,000,  making  a  total  loss  of  more  than  $124,- 
000,000  for  the  year ;  and  all  this  at  a  time  when 
large  increases  in  net  were  imperatively  needed. 

I  am  giving  you  in  rough  outline  a  picture  of 
coming  disaster.  You  yourselves  can  fill  in  the 
background  and  the  perspective.  You  can  tell 
as  well  as  I,  how  much  further  traffic  will  be  re- 
duced by  reason  of  a  diminished  purchasing 
power  at  home  and  abroad,  and  to  what  extent 
enhanced  pressure  is  to  fall  upon  the  world's 
depleted  supply  of  capital  growing  out  of  the 
war.  You  may  judge  for  yourselves  how  impos- 
sible it  will  be  for  the  United  States  to  buy  back 
from  Europe  even  one-fifth  or  one-tenth  of  the 
American  railway  securities  now  owned  abroad, 
which  securities,  wholly  apart  from  the  war  itself, 
have  fallen  to  low  estate  in  the  estimation  of 
foreign  investors. 

Significant  as  these  matters  are  in  their 
application  to  our  railways,  they  are  but  details. 
Overshadowing  all  else  is  the  fact  that  $578,- 
000,000  of  American  railway  bonds  are  now 
in  default  because  of  the  inability  of  the  com- 
panies to  earn  the  interest  agreed  upon ;  and  that 

25 


the  funded  debt,  notes,  and  bills  payable  matur- 
ing during  the  calendar  year  1915  by  all  com- 
panies, amount  to  the  staggering  total  of  $817,- 
465,970 — none  of  which  takes  into  account  the 
mass  of  new  financing  made  necessary  each  year 
by  simple  replacements  and  deterioration.  Where 
is  this  money  to  come  from?  It  will  not  suffice 
to  say  that  the  situation  is  one  of  difficulty;  it  is 
one  of  the  utmost  gravity. 

Railways  are  fixtures;  we  are  so  accustomed 
to  them  that  we  have  come  to  regard  them  as  a 
part  of  our  life,  like  sunshine  and  rain.  We  ex- 
pect at  their  hands  regularity,  promptness,  care- 
fulness and  safety  as  to  passengers  and  freight. 
We  look  to  them  to  suppress  strikes,  to  build  new 
terminals,  bridges  and  extensions,  to  abolish 
grade  crossings  and  to  find  a  way  to  compass  all 
these  ends  without  complaint.  We  depend  upon 
them  so  absolutely  that  we  could  not  possibly  get 
on  without  them  even  for  a  brief  time.  Yet  we 
permit  the  efficiency  of  these  350,000  miles  of  im- 
proved national  highways  to  be  impaired,  and 
the  billions  of  invested  capital  depreciated, 
through  our  failure  to  insist  upon  a  maintenance 
of  that  mainstay  of  the  country's  prosperity  which 
is  represented  by  railway  credit.  Last  year  alone 
42  of  the  48  States  introduced  1,495  separate 
bills  affecting  railways,  99  per  cent,  punitive  and 
restrictive,  and  i  per  cent,  constructive  and  help- 
ful; while  continuously  since  1910  the  Eastern 
railways  have  petitioned  the  Interstate  Commerce 
Commission  for  a  meagre  increase  in  rates,  with- 
out success. 

26 


Railway  managers  will  no  longer  submit  to 
raids  on  their  properties  under  the  thin  veneer  of 
State  regulation.  Henceforth  they  will  fight 
back.  At  last  week's  election  in  Missouri,  a  hot- 
bed of  anti-corporation  sentiment,  the  railroads 
boldly  went  before  the  people  under  the  referen- 
dum asking  that  the  Full  Crew  Law  of  1912  be 
annulled.  It  took  courage  thus  to  beard  the  lion 
in  a  State  that  has  long  reeked  with  anti-corpora- 
tion influence,  and  nothing  was  more  unlikely 
than  a  victory.  But  the  railroads  won  in  a  walk, 
and  they  always  will  win  if  they  fight  in  the  open 
for  a  worthy  cause  with  clean  hands.  The  Full 
Crew  Law  thus  defeated  by  an  awakened  public 
conscience  in  Missouri,  is  also  one  of  the  orna- 
ments of  the  statute  books  of  our  own  State  of 
New  York.  It  does  not  belong  there  and  it 
should  be  stricken  off.  It  is  not  a  Full  Crew 
Law ;  it  is  an  Extra  Crew  Law,  neither  more  nor 
less  than  a  waste  of  capital  designed  to  placate 
the  Labor  Unions.  The  more  labor  receives  from 
the  railroads  the  less  it  gives.  The  output  in 
transportation  units — that  is,  passenger  miles  and 
ton  miles,  has  actually  decreased  in  ten  years 
despite  continuous  grants  to  labor.  Labor's  ma- 
chinery and  tools  have  been  improved,  there  has 
been  constantly  increasing  managerial  initiative, 
wages  have  been  steadily  increased,  yet  the  dol- 
lar paid  railway  labor  today  is  actually  less  pro- 
ductive than  it  was  ten  years  ago. 

So  long  as  the  Interstate  Commerce  Commis- 
sion concerned  itself  with  public  safety  and  the 
public  right  to  equal  treatment  for  all,  it  did  its 

27 


work  well.  It  performed  a  real  public  service, 
for  example,  when  it  insisted  upon  uniform 
methods  of  accounting.  It  was  sustained  by  the 
sound  judgment  of  public  opinion  when  in  1910 
it  held  that  the  railways  had  failed  to  make  out 
a  case  for  higher  rates.  But  when  this  Commis- 
sion of  seven  laymen,  political  appointees,  under- 
took to  assume  full  jurisdiction  over  rates  on  the 
interstate  traffic  of  350,000  miles  of  complex  and 
wholly  different  systems  and  neighborhoods, 
supervising  the  capital  expenditures  of  the  com- 
panies and  controlling  their  security  issues  and 
equipment,  even  to  statistics  of  fuel  consumption, 
firing,  locomotive  tests  and  car  movements,  as 
revealed  by  the  questions  put  at  last  year's  hear- 
ing, it  went  too  far  and  attempted  too  much.  No 
commission  on  earth  could  perform  that  task 
efficiently.  Mr.  Brandeis  himself  could  not  do  it. 
If  in  small  affairs  the  railroads  are  violating  the 
law  every  day  it  is  because  they  have  to.  How  can 
a  railway  run  its  trains  from  State  to  State  with 
48  legislative  hoppers  grinding  out  new  laws  all 
the  time,  ranging  from  9- foot  sheets  to  ash-pans, 
and  not  violate  a  law  here  and  there?  You  and 
I  and  the  citizens  of  all  the  States  are  responsible 
for  this.  We  put  the  men  in  office  who  make 
these  laws;  we  who  sit  by  without  protest  while 
railway  credit — the  biggest  and  most  important 
thing  in  America  next  to  agriculture — is  sand- 
bagged by  the  politicians.  Credit  is  a  power 
which  may  grow,  said  Bagehot,  but  which  can- 
not be  constructed.  Break  up  the  great  and  firm 
system  of  credit  under  which  American  railways 


have  made  this  country  rich  and  prosperous,  and 
you  will  never  see  that  credit  return  in  your 
generation. 

Mr.  Brandeis  and  his  colleagues  contend  that 
the  conditions  arising  from  the  war  in  themselves 
make  an  increase  in  freight  rates  at  this  time 
too  burdensome  to  be  borne;  the  business  of  the 
country,  they  say,  cannot  afford  to  pay  it,  and 
criticism  is  directed  at  the  roads  for  not  first 
reducing  their  dividends.  The  answer  to  this  is 
that  very  many  of  the  largest  shippers  in  the 
country  are  themselves  strongly  in  favor  of  an 
increase  in  rates;  but  even  if  that  were  not  the 
case,  is  there  nothing  more  to  this  issue  than  the 
interests  of  shippers?  The  important  thing  is 
not  what  will  happen  to  shippers,  but  what  will 
happen  to  the  whole  public  if  railway  credit  is 
further  impaired,  if  railway  facilities  fall  behind 
the  needs  of  the  country,  and  if  foreign  owners, 
in  disgust  at  our  confiscatory  policy,  unload  their 
securities  on  the  New  York  market.  Will  it  not 
cost  the  public  vastly  more  to  face  a  disaster  to 
railway  credit  than  to  provide  the  roads  with  the 
means  to  prevent  such  disaster? 

Gentlemen,  this  war  will  pass.  So  also  will 
the  problems  arising  from  it;  but  the  business 
of  transportation  will  remain  the  weakest  point 
in  our  armor.  It  has  become  the  fashion,  and  a 
very  good  fashion  it  is,  to  be  an  optimist  and 
to  face  the  future  with  confidence.  But  in  facing 
the  future  we  must  also  face  the  facts.  The  plain 
truth  is  that  we  are  confronting  a  crisis.  The 
time  has  come  to  cease  flattering  ourselves  with 

29 


delusions  about  prosperity,  or  exports  to  South 
America,  or  any  other  source  on  which  we  may 
base  the  hope  of  a  prosperous  millennium. 
What  is  the  use  of  painting  rosy  pictures  of  our 
foreign  commerce  while  throttling  our  domestic 
commerce  ?  Bankers  in  New  York  can  meet,  and 
always  have  met  successfully,  the  ordinary  diffi- 
culties that  are  a  part  of  the  Nation's  life  and 
growth.  They  have  built  up  a  credit  system  which, 
when  we  consider  the  difficulties  involved,  is  a 
monument  to  their  patience  and  skill;  they  have 
created  a  market  for  our  securities  in  foreign 
countries  not  exceeded  by  any  other  nation;  they 
have  shown  at  all  times  a  cordial,  desire  to  serve 
the  public  good  in  every  quarter  of  the  land.  But 
with  all  their  power,  skill  and  resources  they 
cannot  prevent  a  disaster  which  will  shake 
the  solid  bed-rock  of  the  Nation  itself,  unless  we 
adopt  at  once  a  new  policy  of  fair  play  for  the 
railroads. 

What  is  the  remedy?  The  five  per  cent,  in- 
crease in  freight  rates  asked  by  the  Eastern  roads 
may  be  dismissed  as  negligible.  Even  if  granted 
in  full  it  will  not  net  the  railways  in  Eastern 
territory  more  than  $45,000,000,  while  the  needs 
of  these  identical  properties  for  refunding  and 
other  imperatively  necessary  improvements  in  the 
coming  year  are  $150,000,000.  I  do  not  mini- 
mize the  importance  of  the  moral  effect  that  will 
ensue  if  the  Commission  establishes  the  prin- 
ciple of  fair  play  through  increased  revenues,  but 
the  application  of  that  principle  will  not  of  itself 


suffice  to  restore  railway  credit.  The  Eastern 
roads  alone  have  lost  $100,000,000  in  net  revenues 
since  their  application  last  year  for  an  increase 
in  rates.  If  the  railway  problem  is  to  be  solved 
at  all,  it  cannot  be  solved  in  this  way,  and  we 
must  therefore  look  farther. 

First,  there  must  be  no  increase  in  taxation. 

Second,  Federal  regulation  superimposed  on 
State  regulation  must  cease.  Constitutionally, 
Congress  has  paramount  authority  over  interstate 
commerce,  and  by  its  action  can  abrogate  any 
previous  action  of  the  States  which  may  prove 
inconsistent  therewith. 

Third,  the  railways  must  be  given  a  Federal 
charter  and  placed  under  the  jurisdiction  of  an 
authority  in  which  business  men,  railway  men 
and  public-spirited  citizens  predominate  to  the 
exclusion  of  politicians.  This  form  of  administra- 
tion, in  its  system  and  method,  might  well  be 
modelled  on  the  general  plan  of  the  Federal  Re- 
serve Act,  dividing  the  railroads  into  geographical 
districts,  governed  by  Boards. 

Failing  some  such  transfer  of  authority  the 
railways  will  be  justified  in  saying  to  the  Gov- 
ernment, "You  have  placed  our  properties  in 
inefficient  hands  and  you  have  subjected  us  to 
vexatious  and  hazardous  difficulties.  The  States 
and  the  Government  have  taken  over  our  prop- 
erties in  fact  and  are  administering  them  in  fact. 
Under  these  conditions  our  credit  has  become  im- 
paired, and  we  have  no  means  of  conducting  the 
transportation  industry  to  meet  the  public  de- 
mand. We  therefore  ask  that  you  take  over  our 

'31 


properties  in  law,  and  reimburse  their  owners  to 
the  full  extent  of  their  value." 

Gentlemen,  the  railways  of  America  are  today 
praying  for  relief  literally  on  their  knees.  With- 
out relief  they  will  be  on  their  backs,  and  when 
they  are  on  their  backs  there  will  be  more  trouble 
in  this  country  than  you  and  I  care  to  contemplate. 
The  only  relief  that  will  prove  effective  is  relief 
from  the  whole  disastrous  system  of  dual  con- 
trol, relief  from  politicians  and  prosecuting  at- 
torneys, and  above  all  else,  relief  from  the 
tyranny  of  prejudice. 


32 

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